Is No Credit Better Than Bad Credit?

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Is no credit history better than a bad credit history? Yes, no credit history is better than a bad credit history, but both can hold you back. A bad credit history shows potential lenders a bad track record of managing your credit history. On the other hand, no credit history means that you don’t have much experience, so lenders can’t predict how you’ll handle paying off your debts. For example, someone with no credit history may have a hard time getting approved for today’s best credit cards, and someone with a bad credit history may have a hard time applying for credit, renting an apartment, etc.

Fortunately, there is a solution. Whether you’re just getting started with credit or have made financial mistakes in the past, the next step is simple: learn what it takes to build your credit score and start working toward reaping the benefits of good credit.

Here’s what you need to know about your situation and how to improve it.

What does it mean to have no credit history?

If you check your credit profile and it says “No credit score” or “No credit history,” you fall into the category of no score or no credit. While these terms may seem bad, they aren’t necessarily bad. If you have no credit history, your credit score isn’t zero. Rather, it’s nonexistent.

There isn’t enough information in your credit profile for the credit bureaus to assign you a score. There are a few reasons why this could happen:

There are no credit accounts that report to the big three credit bureaus (Experian, Equifax, TransUnion).
It’s been a while since I’ve actively used credit.
I recently opened my first credit account, but it hasn’t been open long enough for my score to generate information.
You are a new adult or someone who recently immigrated to the country.

If so, you’re not alone: A 2021 study by FICO, the most widely used credit scoring model, found that about 53 million Americans are unscorable. The data is based on the 2020 U.S. Census and is the most recent available data from FICO.

What are the disadvantages of not having credit?

Lenders evaluate people based on their past credit history. A blank credit report with no evidence of borrowing history signals to lenders that you are inexperienced. This makes lenders unsure and more likely to deny you loans like auto loans, credit cards, and mortgages. Plus, even if an issuer does approve you without a credit history, it could cost you more to borrow from them than someone with good to excellent (670 to 800+) credit.

4 Ways to Build Your Credit Score from Scratch

You can’t build your credit score unless you start taking actions that will show up on your credit report. Here are four examples:

Open a student credit card, secured credit card, or other credit card for people with no credit history.
Apply for a different type of loan and make your payments on time.
Sign up for a service that reports on your rent and bill payment history.
Be an authorized user on a trusted family member’s credit card.

Lenders report these financial activities to the three major credit bureaus, which can help you build a good credit history. Many people start building their credit history by getting their first credit card. Others start with a car loan or student loan, which may require a guarantor if you don’t have a credit history.

You can also have a trusted family member added as an authorized user on your credit card if they have a history of responsible credit use. Most issuers report account activity on the authorized user’s credit report, meaning you can build credit by having a parent or spouse’s established credit line reported on your report.

Alternatively, if you pay rent to a leasing company or make other bill payments that don’t normally get reported on your credit report, you can use a rent and bill reporting service like Experian Boost. These services will record your on-time payments and report them to the credit bureaus on your behalf, although the actual impact on your score may vary depending on the credit bureau and credit scoring model.

What does bad credit mean?

In the FICO scoring model, someone with poor credit has a score between 300 and 579. A score between 580 and 669 puts you in the fair credit range, and a score above 670 gives you good credit.

The VantageScore model works similarly, but is less widely used: someone with very poor credit has a VantageScore between 300 and 499, someone with poor credit has a score between 500 and 600, someone with fair credit has a score between 601 and 660, and someone with good credit has a score starting at 661.

If you have a low credit score, you may see a variety of negative marks on your credit report, including:

Late or Missed Payments
Bankruptcy or inability to repay debts
Too many hard credit checks
High credit utilization

Your poor credit score is probably the result of a combination of several of these factors, all of which can affect your score. To determine what’s affecting your credit score, check your credit reports from each credit bureau. If none of the factors above apply, check your report for fraud or misinformation that could lower your score.

how do Is bad credit hurting you?

Financial institutions are reluctant to lend to consumers with poor credit, and if their credit history reflects past credit mistakes, they are considered a higher risk of not paying back the money they borrow.

As a result, it’s often hard to get approved for a new loan if you have a low credit score, and loan issuers charge higher interest rates for people with low credit scores. Additionally, landlords, mortgage issuers, car dealerships, and even potential employers may be hesitant to do business with someone with a low credit score.

4 ways to improve bad credit

A poor credit score can limit your access to things you might need in the future, like a mortgage or car loan. To improve a damaged credit score, you need to demonstrate a pattern of responsible financial habits.

First, check your credit reports from each credit bureau to see exactly what’s affecting your score. If you find an error on your credit report, dispute it with the credit bureau or company that reported the false information. Second, develop responsible credit habits.

Make payments on time every month
Lower your credit utilization ratio
Introduce new credit accounts, such as credit cards, designed for people with poor credit
Minimize hard credit checks

Why Bad Credit is Worse than No Credit

With no credit, you have little to no evidence to show what kind of borrower you are. On the other hand, with bad credit, lenders have concrete evidence (such as late payments or bankruptcies) that you’re a higher risk borrower.

Having a bad credit score has many negative consequences. Some lenders may reject your loan application outright or charge you a high interest rate even if you are approved for a credit card or loan. A bad credit score can also affect your ability to rent an apartment or get a job.

While having no credit has many of the same negative effects, people with bad credit can quickly build a good credit score by adopting solid financial behaviors.Without the worry of negative marks on your credit report, establishing good credit is as easy as opening a starter credit card and proving to lenders that you can use credit responsibly.

Conclusion

Does no credit mean bad credit? Not necessarily. No credit is better than bad credit, but neither situation is good in the long run. Knowing how to build credit can help you overcome the obstacles that come with no credit history or a low credit score.

Whether you’re applying for a starter credit card to establish a credit history or a secured credit card to rebuild your credit, be sure to practice responsible credit habits: make all your payments on time, keep your balances low, and avoid applying for too much new credit at once. Track your credit score as it grows, and be ready to reap all the financial benefits that good credit brings.